Doubts are bubbling up about the current federal strategy for ending the credit crisis, even as the US government puts trillions of dollars on the line to shore up America’s shaky financial system.

At the heart of the issue is this: Is all the public money being poured into financial firms helping, or is it delaying the private sector’s unavoidable reckoning with losses?

The question is arising in hearings on Capitol Hill. It’s surfacing within the Federal Reserve itself. It is showing up in financial markets. This doesn’t mean the White House faces immediate pressure to change course, but President Obama and his economic team will navigate some difficult choices in the weeks ahead.

The options, economists say, include asking Congress for a lot more money for banks, hoping that the money committed to date will be enough to fuel an economic recovery, or reshaping policies so that bank investors shoulder burdens instead of taxpayers.

“We talk about this as if we can forestall these [bank] losses” by deploying public money, says Joseph Mason, an economist who focuses on the financial industry. “It might make sense to stop and see if we even can ... address this situation in this particular manner.”

Costs up and up

Some symbols of the rising price tag for financial rescues include the following:

•Money committed to the rescue of insurance firm AIG has climbed from an initial $85 billion last fall to $180 billion. That figure could rise further.

•Mr. Obama provided in his proposed budget for as much as $750 billion in additional financial bailout money, on top of the $700 billion that Congress has already committed. Obama has not yet formally asked for any of that added money.

•The Senate is considering a bill, backed by the administration and the Federal Reserve, that would provide a $100 billion line of credit to the Federal Deposit Insurance Corp., the agency tasked with handling failed banks. The funds would help ensure that the FDIC has adequate money at a time when more small and mid-size banks are expected to become insolvent.

Members of Congress are getting complaints from voters, who, in a recent poll, mostly disapproved of bailouts for financial firms, and in turn the lawmakers expressed frustration in hearings last week.

Fed turns critical

One implication: In this political climate, getting approval for more money to help banks won’t be easy.
Some of the criticism is coming from within the Fed itself.

“We have been slow to face up to the fundamental problems in our financial system, and reluctant to take decisive action with respect to failing institutions,” said Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, in a speech Friday. Despite trillions of dollars in public resources committed to the crisis by the central bank and the Treasury, “we have yet to restore confidence and transparency to the financial markets, leaving lenders and investors wary of making new commitments,” he said.

The credit breakdown has direct consequences for the economy.

The unemployment rate has jumped from 5 percent to 8 percent in the past year, with the breakdown in the banking system playing a big role, shaking consumer confidence and fraying business access to credit.

Agreed: Banks hold key
Financial-industry policies are just part of a larger web of economic recovery programs that the Obama administration is pursuing, in concert with the Fed. But those financial policies must succeed, Obama and his critics both say, to enable any economic rebound.

Treasury Secretary Timothy Geithner has unveiled the outlines of a “financial stability plan,” which has two elements to help banks that are being hit by a wave of loan defaults.

First, regulators are assessing the health of the largest banks, to see which banks need to raise fresh capital to weather the recession. If a bank needs capital and can’t get it from private investors, the Treasury plans to provide it.

Second, Mr. Geithner is working to set up a public-private investment fund that will buy troubled loans at marked-down prices, as a way of helping to clean up bank balance sheets.

Separately, officials including Geithner and Federal Reserve Chairman Ben Bernanke are responding to the emergencies that some big corporations find themselves in. Last week’s enlarged bailout for AIG came just days after the bank Citigroup got new assistance.

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